If the default risk of corporate bonds decreases, relative to US Treasury bonds, then the equilibrium yield on corporate bonds will_____ and the equilibrium yield on US Treasury bonds will _____.
Group of answer choices
rise; rise
rise; fall
fall; rise
fall; fall
Substitute goods are those goods that can be used in place of each other. When people will go to buy bonds, they will have two options on the market: corporate bonds and US treasury bonds. So these are substitute products. When the demand for one good rises due to one or the other reason, the demand for another will fall.
Here, since the default risk on corporate bonds decreases, people will tend to prefer more of corporate bonds and less US treasury bonds due to the risk factor. This will increase the equilibrium for corporate bonds and decrease the same for the US treasury bonds.
the equilibrium yield on corporate bonds will rise and the equilibrium yield on US treasury bonds will fall. This makes all the other option automatically wrong.
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If the default risk of corporate bonds decreases, relative to US Treasury bonds, then the equilibrium...
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